Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr.

Trevor Caldwell, Vice President of Investor Relations and Strategic Incentives, you may begin your conference..

Good afternoon, everyone, and welcome to Marchex Business Update and First Quarter 2019 Conference Call. Joining us today are Michael Arends, and Russell Horowitz.

Before we begin, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including references to our financial and operational performance, and actual results may differ materially from those contemplated by these forward-looking statements.

Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent Annual and Quarterly Report filed with the SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we take no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

The earnings press release is available on the Investor Relations section of our website. At this time, I'd like to turn the call over to our Chief Financial Officer, Mike Arends..

Thank you, Trevor. Good afternoon, and thank you, everyone, for joining us today. Marchex continues to make meaningful progress that is setting the foundation for growth this year and beyond. Our progress is tied to our continued focus on three strategic pillars.

The first is creating a lean conversational analytics and sales acceleration solutions platform. The second is launching world-class products that solve critical problems for our customers. And the third, landing new customers while expanding opportunities to grow our existing relationships.

I'll start by talking about our conversational analytics and sales acceleration solutions platform. We began reimagining our Company a few years ago because we started seeing a shift in demand in consumer and customer need. This shift was driven by an increasingly complex customer communications landscape.

As consumer communication channel preferences started to shift beyond e-mails and calls to include texts, chats and social media, brands immediately began to look for robust, scalable technology-driven solutions capable of providing cohesive customer experiences across a fragmented customer communications landscape.

We recognized right away that brands that ignored the upcoming massive shift in customer communication preferences would miss out on millions of customer opportunities and billions of dollars in sales.

Additionally, more and more businesses wanted to drill deeper into the conversations they were having with their customers, regardless of the communications channel, to improve customer engagement and create better experiences with their brand.

The problem was they lacked visibility into the sales process across each of these communication channels and a cohesive customer experience. Listening to our customers, we focused on expanding our AI-driven analytics and sales acceleration solutions across additional communications channels.

The solutions we built utilizing our speech technology and our long history of selling the sales and marketing organizations made us uniquely positioned to solve these problems and capitalize on this emerging opportunity.

We had a massive conversational dataset built on processing millions of customer-to-brand voice conversations that could drive a wider informed solution set for a multi-billion dollar market.

And as a result, we began increasing the investment we were pouring into building one of the world's most advanced conversational analytics and sales acceleration solutions platform. Today, we are starting to see the fruits of that investment.

We now have more than 1 billion minutes of conversations between consumers and businesses integrated into our proprietary AI infrastructure built by our AI and Data Science team. This is the foundation of Marchex's future applications and innovations.

And to that end, we have already deployed solutions that capture consumer intent and measure sales performance as it's happening in the course of sales conversations.

Most recently, we launched a powerful cloud-based conversational intelligence platform that captures the customer journey across multiple communication channels, including voice and text. Marchex Stream is the engine that drives actionable insights as conversations happen across phone calls, SMS, messaging and chats.

Speed and accuracy are everything in sales. And Marchex Stream dramatically enhances the velocity and horsepower of our growing AI-driven solutions. With Marchex Stream, we can meet the needs of any customer, large or small, across a range of verticals.

Our technology innovation is helping us develop AI-driven signals for important verticals such as auto, home services, financial services, healthcare and several others. Another recent example of our progress with innovation is Marchex Sales Rescue, a new AI call monitoring, scoring and engagement solution.

This product was accelerated by our acquisition of Callcap and combines the power of artificial intelligence and machine learning. Sales Rescue can alert businesses when potential buyers hang up without making a purchase or when certain calls did not meet the company sales or customer service standards.

It can even rapidly identify calls that are being mishandled, which gives businesses the opportunity to redirect conversations to capture potential lost opportunities and prevent that potential sale from going to a competitor. All of the information I have described streams to businesses in real-time.

We anticipate testing this product with a limited number of customers in the near-term. And this all leads to an update on our customer momentum. We continue to add customers in strategic verticals such as home services, travel and auto. In fact, we are just now rolling out a major new auto relationship after a robust trial in integration process.

While the ramp of this relationship will take time given the nature of this type of customer, we believe this will set the stage for a multiyear, multi-million dollar relationship.

This process is informing our future relationships with other large auto brands and services of valuable example to help us develop and onboard new customers in other verticals. And with that, I'd like to hand the call to Russ..

Thanks Mike. In recent weeks, we made some important changes. We've evolved our Board of Directors with the addition of new talent perspectives, and I'm also glad to have expanded my role as Executive Chairman. Our business has made considerable progress over the last two years.

We've taken our proven capability to accelerate sales for brands with customers over the phone and aided a much broader application for new larger markets around sales acceleration solutions and omnichannel communications.

In many ways, our market leadership in call analytics created a unique and valuable set of assets that's provided advantages in our strategic evolution into conversational analytics and sales acceleration solutions across both voice and text. We're now uniquely positioned to deliver these solutions across an array of customer communication channels.

These products are meaningfully more valuable in today's market because of the increasing demand by businesses to engage with their customers in their preferred communication channels.

Marchex's strategic product evolution provides businesses with real time in-conversation visibility, personalization opportunities and analysis across both speech and text, derived from AI and machine-learning technology and reflects our recognition of the shift in critical problems our customers are looking to solve.

2019 represents another important year and setting the foundation for future growth, as we launch new products on a new technology platform. As Mike outlined, our AI capabilities are expanding and this is helping businesses create better customer experiences while capturing more sales. Our progress is far from complete.

We're continuing to innovate and look at the ways we can strategically help our customers, meaningfully add value to our platform, augment our operating profile and focus on both running and scaling our business with operational excellence. And with that, I'll hand the call back to Mike..

Thanks, Russ. Okay, so let's look at the numbers for the first quarter. Total revenues were $26.4 million.

Revenues from our core analytics products now comprise nearly 50% of the total business, with strong year-over-year growth, which also had an aggregate benefit on service costs as a percentage of revenue, given the higher gross margin characteristics from this revenue stream, and meanwhile, we continue to see benefits from some of our recent sales efforts and saw a modest growth in marketplace revenue for the second quarter in a row.

Looking more closely at core analytics products, we saw a meaningful year-over-year revenue growth at $12.8 million. On an annual basis, we saw progress particularly in verticals like auto where we are winning new long-term customer relationships and just beginning some of the rollouts of customers we've had in trials and early integrations.

We were also successful in turning some shorter-term relationships into multiyear commitments, and we recently signed our first three-year commitment with a home services customer.

Also, on a year-over-year basis, exclusive of the acquisitions, estimated pro forma growth remained in the double-digit percentages, driven by continued adoption of products built on our proprietary speech technology. As our recent product progress highlights, we are now moving further into the integration plans for Callcap and Telmetrics.

As we begin integrating platform capabilities, cross-sell products and jointly launch new products, we expect pro forma growth breakouts, exclusive of acquisitions, to become less distinguishable.

We feel good about the pipeline of opportunity across our analytic products, and while there is much to do, we are using our combined sales efforts and new products to open up new verticals and market segments in conversational analytics and solutions. And switching to marketplace.

Revenue grew sequentially in the first quarter as we saw some budget increases from certain large customers. As a reminder, Q1 is typically the strongest quarter for our marketplace product given the nature of the seasonal spending trends of several of our large financial services customers in this product area.

During the quarter, we also saw progress in our DexYP relationship, with growth primarily driven by increases in marketplace initiatives. This was offset against the ongoing decline in the legacy, Local Leads, revenue which is consistent with past commentary. We anticipate to transition at some point this year.

While there are various moving pieces in this relationship, we look forward to close long-term relationship with DexYP and continue to believe Marchex can play a valuable role in helping DexYP and other local aggregators. And looking at the P&L for the first quarter.

Excluding stock-based compensation and amortization of intangible assets, total operating costs for the first quarter were $25.7 million compared to $22.1 million in the first quarter in 2018. Service costs were $14.2 million, up from $12.7 million in the first quarter of 2018.

And note, a modest decrease occurred in service costs percentages on a year-over-year basis due to a slightly higher mix coming from our analytics products. We continue to expect the analytics revenue stream to have a favorable long-term impact to our service costs as a percentage of revenue.

As we launch new analytics products, we expect that will further support that trend over time. Sales and marketing costs were $3.9 million. This amount was relatively flat compared to the first quarter of 2018 on a percentage basis. Product development costs were $4.5 million, relatively flat compared to the first quarter of 2018 on a percentage basis.

Product development remains a key focus for our investments in new products and capabilities, the launch of Marchex Stream is an example of some of the infrastructure investments we are making to support our future products and AI capabilities. Now moving to profitability measures.

Adjusted operating income before amortization for the first quarter was $692,000. Adjusted EBITDA was $1.2 million. Net loss applicable to common stockholders was $1.3 million for the first quarter of 2019 or $0.03 per diluted share compared to a net loss of $926,000 or $0.02 per diluted share for the same period of 2018.

Adjusted non-GAAP income per share was $0.01 per share compared to adjusted non-GAAP loss of $0.00 per share for the first quarter in 2018. Additionally, we ended the first quarter with approximately $51 million in cash on hand. And during the quarter, we continued to generate cash and also received a large prepayment from a customer.

Now turning to our outlook for the second quarter. We're forecasting revenue of $25 million or more for the second quarter. As a reminder, the first quarter is typically the high watermark for the marketplace product given the spending trends of certain financial services customers that spend disproportionally in the first half.

For core analytics revenue, we expect $12.8 million or more, representing significant growth on a year-over-year basis and on an estimated pro forma basis.

We believe the trajectory for double-digit percentage growth we referenced for core analytics prior to our November acquisitions will continue into the second quarter of 2019, excluding contributions from the recent acquisitions.

The solutions we've built with our speech technology are resonating in key verticals, and several of the relationships we've secured in the last year are still at an initial integration stage. As these initiatives rollout more fully, we expect it will give us further visibility into 2019 regarding our current growth and momentum.

We are continuing to win new trials in areas such as the auto vertical, which we believe can support long-term growth. And as we look to capitalize on our lead-in vertical, such as auto and replicate that early momentum in other verticals, we believe we are in a good position to drive future growth.

In addition, we are converting many customers to long-term multiyear relationships due to the stickiness of our products, introducing more sales acceleration solutions and opening new verticals and market segments within conversational analytics.

Each of these initiatives help support our growing pipeline of opportunity, and we believe this can lead to increased operating leverage over time. Next, looking at adjusted OIBA and EBITDA for the second quarter, we are forecasting adjusted OIBA of breakeven or better.

And for adjusted EBITDA in the second quarter, we are forecasting $1 million or more.

Throughout this year, we expect to continue investing in our speech technology, artificial intelligence, machine learning and Data Science initiatives, our strategic vertical initiatives, and expanding our conversational analytics and sales acceleration solutions into new customer communication channels across voice and text.

By virtue of our history in delivering strong results for our marketing customers, Marchex is developing a unique suite of conversational analytics solutions, purpose-built for this opportunity.

The unique data advantage we've built through solving critical needs for many of our customers in the sales and marketing channels gives us the ability to continue innovating as this market emerges.

We made significant progress over the last year, and we believe Marchex is positioned today to emerge as a leader by virtue of the customers we are winning and the people and the assets we have to support further innovation. I would like to thank all of our employees for their commitment and hard work.

And we look forward to updating you on the next call. And with that, we'll hand the call back to the operator to take any questions..

[Operator Instructions] And your first question comes from the line of Darren Aftahi with ROTH Capital Partners..

Hey, guys. Thanks for taking my questions and congrats on a nice quarter. Mike, I guess to start - first is for you, I know you've had, like, double digits growth.

Can you talk about what organic analytics growth was in the quarter?.

So the double-digit growth that actually is the organic growth rate in terms of the core analytics on a year-over-year basis. The pre-acquisition was in the double-digits. We've referenced historically, some of the other references too. The acquired companies are a little bit lower than that.

And so that mix gets you into the growth rates that we've looked at..

Got it.

And then on the move from the - with auto customer from pilot to rollout, can you just talk about maybe the timeframe that customer was in pilot, and then what kind of ramifications that can have for potentially other auto customers and pilots in terms of accelerating lead to pilot to kind of sales cycle, if you will?.

This is Russ, thanks for the question. With some of these larger enterprise customers, when you're looking at kind of broader institutional rights, the pilots can be fairly extended. Getting through that phase to the point that you're now kind of being embedded in this kind of mission critical, it can be - even it could up to a year.

Getting through that for us, obviously puts us in a place where we think there's a lot of opportunity and a lot of headroom to grow in to, and with each of these, they become very good examples or case studies since folks in this industry look at what's going on and kind of whose is on the front lines of innovation.

So we think yes, this can be a catalyst in this headroom on its own. And we do think that it can also serve as an example and tighten some cycles on other opportunities.

Again, hard to forecast those specifically as part of this process, but when we think about our team and we think about the opportunities, and we think about opportunities to accelerate, this helps..

Got it. A couple more, if I may, so can you give your total number of analytics customers? And then I guess, within that - so you spoke on and launched Stream and Rescue recently.

Can you talk about kind of how many of those customers are actually either piloting or using those right now? And what's kind of the total addressable market as your entire base? And then just as a segue from that question if you look over kind of the next 24 months, how many types of kind of new add-on analytics products we kind of going to see in the pipeline? Thanks..

Sure. Good multiple questions there. Our aggregate customer roster is more than 1,000 customers that are using our products. Obviously, within that, you've got some very large world-class enterprises and you've got some others who are the kind of smaller end of the spectrum. But that will directionally let you know what that scale looks like.

As we go forward and I'm trying to remember each of the questions. Over the last week, we formally introduced the both, Sales Rescue and Marchex Stream. And those for us are pretty exciting because last year, we really prioritized our investment around our MIND Labs developing in terms of AI capabilities.

And we knew that really evolved from historically where call analytics was, which was about attribution and analytics. Analytics allows you to kind of surface, insight and discovery.

But what we think is the bigger opportunity is you move beyond voice-to-voice and text, is how do you take those discoveries and then create tools or solutions with automation that can deliver that recurring value to these customers.

To do that, we knew that there were certain components that were prerequisites, both as related to kind of security and scale and speed.

So with Stream, we take kind of this multiple parallel investments, both given our organic initiatives and with some of the acquired companies to now create this platform that's going to accelerate our ability to deliver applications, the new products to the market that increasingly bring tools and automation to - there.

Sales Rescue ends up being an example where we're able to take kind of the AI aspects of what Marchex has been developing, and accelerate a kind of very important product along with Callcap capabilities on the call monitoring side, that really differentiates us. So we're not breaking out right now how many folks we're trialing these with.

We're kind of in the early phases of that. But we think these solutions are broadly applicable, both to our existing customer set and they will be catalyst for us to continue to win new customers too.

When we think about the next, call it 6, 12, 18, 24 months, we think kind of the seeds we planted, going back last year, that are now starting to grow in to products like Sales Rescue and Marchex Stream as our forward-looking platform to support future development and innovation, will allow us to more rapidly launch products around these themes, and those we also view as catalyst to expand our footprint and harvest more opportunity and accelerate..

Thanks, Russ..

Thank you..

[Operator Instructions] And your next question comes from the line of Mike Latimore with Northland Capital Markets..

Yes, thanks a lot. On the - I think you said large auto customer is starting to deploy.

What percent of kind of their dealerships will get deployed by year-end? Can you just update us how fast that might - deployment might occur?.

Thanks for the question, Mike. This is Mike. It's to be determined. We think they will introduce it to a meaningful percentage. I think by the end of the year, it still may be a minority of their total network.

But over the course of the next 18 to 24 months, we hope that it will become the majority of all of the dealerships that they have as part of their network. But by the end of the year, we still think it's going to be a minority. And it should be into hundreds of dealerships and could potentially even the scales above that..

And then you mentioned I think eight new clients.

In the analytics space, what is your kind of win rate? Like on every deal you bid on, what percent you're winning?.

So we haven't broken it out on that basis in the past, but if you look at the opportunities and where we go in and where it's competitive process, it is the majority. So that I think is a fair tracking metric of what we look at internally..

Okay. And you had nice EBITDA in the quarter.

I guess is the analytics business sort of on EBITDA breakeven on its own yet or supporting its own weight?.

We haven't broken out from a segment perspective and we don't track it. From just a contribution perspective, we do and gross margin and the gross margins are higher. If encumbered including all of the overhead of the company and the contribution and just the development effort, you'd probably be getting very close to that level..

Okay, got it.

And then the - can you just comment on the growth in the pipeline for analytics, maybe year-over-year, any percentage change?.

Yes, good question. Directionally, it's encouraging. The thing we think about is do we have headroom with our existing customers. And are we understanding kind of the pain points in a way that we're able to deliver against and help them solve those problems in a manner that's also replicable for others.

And so while we do that, one of the ways we've kind of - we architected our business and our strategy is to apply our technology and expertise at a vertical level. And the goal is to validate that, but do so in a way again that we can replicate in other verticals as well.

So we've had a lot of momentum and success with auto in a pretty short period of time. We talked about kind of looking how to replicate that in home services and we're kind of taking I think meaningful steps on making that happen. And we do view that being replicable again into other verticals as well.

So we do think that we can extend this, both in terms of at a customer level because each customer we have, there's someone else out there like them with a similar problem, and once you get that third-party validation, it tends to accelerate that opportunity.

And to the extent that we kind of gather the learnings around what it means to take our data and our technology and tune those to these vertical-specific use cases and then prove it out with real kind of market-leading customers, it just accelerates our ability to replicate it too.

So we do think this kind of efficiencies and scale that we gain each time we do this right and will be able to hopefully continue to replicate that..

And just last one on the two acquisitions.

When you talk about integration there, does that involve some additional kind of cost reductions at those acquisitions, or is that not part of the plan going forward?.

The primary part of the plan - so it's not cost reduction in the standpoint of some of the infrastructure or the personnel, we actually want to invest more in some of those areas and Marchex Stream is an example.

We do think there may be some margin improvements and just some economies of scale as well as bringing things together when you commonize some of the platforms that create betterments in that regard. So we do see some opportunity for margin improvement in the future because of that..

There's the cocktail element, there's examples like Sales Rescue where we get integration synergies on the product front, and then cross-sell, upsell on a customer level. So we think it's really all three..

Okay. Great, excellent..

Thank you..

And there are no further questions at this time..

Thank you very much for joining us today. And we look forward to providing further updates as we progress throughout the year..

Thank you..

Thank you. This does conclude today's conference call. You may now disconnect..